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17 May 2014

Since China launched the Reform and Opening-up Policy some 30
years ago, its rapid economic growth (averaging 9.5 per cent or more
annually) has substantially cut the country’s unemployment and poverty
rates, especially in rural areas.

China’s rural poverty rate dropped from 18.5 per
cent in 1981 to 2.8 per cent in 2004, and the number of poor people
dropped from 152 million to 26 million.

China’s development is built on an effective
economic system. Its Special Economic Zones (SEZs) were an integral
element of the shift from the planned to the market economy in the
pursuit of development progress.

SEZs, as the pioneer instrument of the Reform and
Opening up Policy, have made great contributions towards absorbing the
rural labour force.

They have absorbed capital and technology,
especially from Hong Kong, which helped in the establishment of China’s
first SEZ — Shenzhen — in the early 1980s.

Soon after, other SEZs like Zhuhai, Shantou and
Xiamen were established. In the 1990s, Pudong New Area in Shanghai and
the Binhai New Area in Tianjin became new economic growth poles.

The key elements for economic take-off in
developing countries are access to capital and to markets. With these
two ingredients, SEZs are able to attract substantial foreign
investment, and to access markets through export trade.

In three ways. First, by encouraging foreign
investment in the value-added processing of materials and goods, in
order to create employment opportunities for the unskilled workforce.

The capital-intensive single manufacturing
structure common in most African countries is not conducive to reducing
poverty and creating employment.

African governments should direct foreign
investment into the labour-intensive industries through preferential
trade and tax policies, such as tax exemptions for manufacturing
companies and export tax rebates.

Governments should use the foreign capital to
develop domestic industries and absorb the low-skilled non-agricultural
workforce into the manufacturing sector.

Absorbing low-skilled workers in these
labour-intensive industries has a multiplier effect in the economy as
these people, now regular wage earners, see their consumer patterns
change to demand more products and services. As industries respond to
this increase in aggregate demand, the economy grows.

Even so, the poverty reduction effect, which is
significant at first, will gradually weaken, as the partially
foreign-owned enterprise develops to become wholly foreign-owned.

At this time, to mitigate this weakening effect, African
governments should encourage foreign capital enterprise to develop
high-tech industries through policy guarantees.

They should also promote competition between
foreign and local enterprises, in order to diversify the industrial
structure with labour-intensive, capital-intensive and
technology-intensive enterprises. Once this happens, the demand for
labour will, once again, increase.

China’s SEZs have already shown that
manufacturing, trade and retail industries can absorb low-skilled
workers, for instance, in the clothing, electronics, chemicals and
machinery sectors.

The manufacturing of consumer goods in Africa
accounts for just around 10 per cent of GDP. Foreign capital can play a
key role here by helping to scale up this component of GDP to become a
major player in the economy.

When foreign capital moves from labour-intensive
to capital-intensive enterprises, the poverty reduction effect of FDI in
the manufacturing sector weakens.

Governments should then encourage foreign
investment in the service sector, such as the commercial and financial
industries. They should also strengthen the links between the
manufacturing and service sectors in order to reduce production and
transaction costs, and strengthen product competitiveness.

Third, by promoting exports. African governments
should encourage the export of manufactured goods, while continuing to
fight trade exploitation, especially in the export of natural resources.

As Shenzhen’s exports increased, excess domestic
production was also being sold through export trade. Whether poor people
can benefit from export trade depends largely on the added value of the
products being sold abroad, and whether they themselves can be part of
the production process.

The gross value of exported goods and services in
sub-Saharan African accounted for some 40 per cent of GDP in 2008, with
natural resources as the main export product.

Since natural resource industries tend to be
highly monopolised, it is difficult for poor people to benefit from
trade exports, let alone improve their living conditions from them.

However, poor people can forge a role for
themselves in the export of value-added goods through new and
specialised industries. If the right incentives are provided and a sound
business environment prevails, these industries will create jobs and
keep the economy and its people going.

Prof Yiming Yuan is based at the China Centre for Special Economic Zone Research, Shenzhen University, China